Do you want to purchase your own office space, expand your business or invest in new properties? Using a commercial mortgage could help you reach your ambitions. 

In this article, we explore how commercial mortgages work, the different types available and what you need to know before applying.

What is a commercial mortgage?

A commercial mortgage (or business mortgage) is a type of property finance that helps companies buy land or property for business purposes. It’s a form of business loan that’s secured against the property, such as an apartment complex, warehouse, private office or shopping centre.

There are other types of commercial property finance, such as auction finance, development loans, bridging loans and construction finance, but these are typically shorter-term funding options.

‍

What are the main types of commercial mortgages?

The three main types of commercial mortgages are as follows: 

• Owner-occupied commercial mortgages: These are used when a business buys a property for its own use, like an office or shop. These mortgages often have lower rates and better terms, as lenders see them as lower risk.
• Residential buy-to-let mortgage: This type of mortgage is for buying residential property to rent out and make a return on investment. It usually comes with stricter lending criteria, focused on rental income, and is often structured as an interest-only mortgage. You may need a larger deposit with a repayment of the full loan amount at the end of the term, once you’ve sold the property or taken out another mortgage.
• Commercial buy-to-let mortgage: These mortgages are for purchasing commercial properties to rent to other businesses. They often require higher deposits, fees and interest rates, with eligibility based on personal credit and business performance.

How does a commercial mortgage work?

As with other mortgages, a commercial mortgage involves significant funds and is a long-term financing agreement for spreading the cost of the property purchase.

Applying for a commercial mortgage consists of various steps. First, you’ll usually complete an online asset and liability form outlining your financial position. Next, you'll fill out a full mortgage application and provide key details about your business, including its structure, income and financial history.

Commercial mortgage lenders will then arrange a professional valuation of the property to assess its market value and suitability as security for the loan. They’ll also conduct legal due diligence to check titles, leasehold or tenancy arrangements and any potential planning issues and restrictions.

If everything meets the requirements and passes due diligence, and the lender is confident in your ability to repay the loan, you’ll receive a formal mortgage offer. This outlines the terms, including interest rates, repayment structure and all other fees.

‍

{{business-funding-on-your-terms="/components"}}

‍

Typical lender requirements in commercial mortgage applications 

To support your application, lenders may ask you to provide the following:

• Business bank statements (usually from the past three months)
• Trading accounts (typically from the last three years)
• Proof of identity and address
• Details of any lease or tenancy agreements related to the property

The whole process can take a few weeks, depending on the size and complexity of the deal and how quickly you can provide the required documentation.

‍

What can a commercial mortgage be used for?

There are several ways to use commercial mortgages, as they offer businesses a range of business opportunities. Here are some common uses:

• Purchasing premises for your business, such as an office, shop or warehouse, where your company will operate from.
• Expanding to new locations to support business growth, including opening additional branches.
• Buying property to let to other businesses – investing in commercial property, such as retail units or industrial space, to rent to tenants (known as a commercial buy-to-let).
• Developing or refurbishing commercial property to make improvements, extensions or conversions to increase value or productivity.
• Refinancing existing commercial property – using an existing mortgage to release equity for other business purposes or to get better terms.

Who can get a commercial mortgage?

If you need a large commercial loan and can put down a large deposit, a commercial mortgage might be right for you. But it also depends on your trading history. Lenders want to be sure your business can afford the mortgage and make the required repayments, so you’ll often need two to three years of filed accounts to be eligible.

A commercial mortgage is a type of secured loan, meaning you pledge an asset, such as office space or other property, as collateral to reduce lender risk. Be aware that if you default on repayments, creditors can take possession of your assets.

If this is a potential issue, consider taking out an unsecured business loan to support your property needs. This could be a good option if you need a smaller amount of money and have a good credit history. Unsecured loans offer greater flexibility over repayments and don’t require the use of property or other assets as collateral, but you still may need to provide a personal guarantee. 

‍

Should I use a broker for a commercial mortgage?

Deciding whether to take out a commercial mortgage loan and choosing the right one are not simple tasks. There’s a lot to consider, plus, if you do decide to go for this option, you’ll likely need to provide a large deposit.

Using a specialist commercial mortgage broker can make the application process more manageable and give you peace of mind. They can offer expertise and explain legal and financial requirements, help you prepare a strong application and choose a suitable solution, while giving you access to a wider variety of commercial mortgage lenders.

‍

How long can you get commercial mortgages for?

A business mortgage usually lasts from three to 25 years. If you want a shorter-term loan for a property purchase, consider using a commercial bridging loan or development loan.

‍

How much deposit do I need for a commercial mortgage?

The deposit amount required will vary, depending on the property’s value, but the percentage required is usually between 25% and 40%. However, commercial buy-to-let mortgages tend to be at the higher end of this scale, due to the increased lender risk. 

Other factors that influence the deposit you need for a commercial mortgage include the type of property being purchased and your financial health and creditworthiness.

‍

What are the typical commercial mortgage fees to expect?

The fees involved can significantly impact the overall cost of your loan. Here's a breakdown of the common fees associated with commercial mortgages:

1. Arrangement fees

The arrangement fee, also known as a processing or administration fee, is charged by the lender for setting up your mortgage. This fee is usually a percentage of the loan amount, typically ranging from 0.5% to 1.5%. It covers the administrative costs of processing your application and securing the loan.

2. Valuation fees

Before approving a loan, lenders require a property valuation to assess its market value and condition. The borrower is responsible for covering the valuation fee, which varies depending on the property's size, type, and location. This fee ensures that the finance provider is not lending more than the property's worth.

3. Legal fees

Both the lender and the borrower will need legal representation to handle the mortgage agreement. The borrower typically pays for both parties' legal fees. These fees cover the cost of preparing and reviewing legal documents, ensuring compliance with regulations, and handling the transfer of funds.

4. Broker fees

If you use a mortgage broker to find the best commercial mortgage deal, you'll likely pay a broker fee. Brokers charge for their expertise in navigating the market, negotiating terms, and finding loans that meet your specific needs. This fee can be a flat rate or a percentage of the loan amount.

5. Early repayment charges

Commercial mortgages often come with early repayment charges if you choose to pay off your loan before the end of the agreed term. These charges compensate the lender for lost interest and can be substantial, so it’s important to consider the terms of your mortgage agreement carefully. Be aware that in some flexible small business loans, like iwoca’s Flexi-Loan, there is no charge for early repayment. 

6. Commitment fees

Some lenders charge a commitment fee, also known as a reservation or booking fee, which secures the funds for your loan. This fee is usually non-refundable and is paid when you accept the lender’s offer.

What are the typical commercial mortgage rates in the UK?

Commercial mortgage rates in the UK will typically be somewhere between 6% and 12%, with these rates influenced by numerous factors, such as:

• Current market conditions (including the Bank of England base rate)
• Your loan-to-value (LTV) 
• Property type
• Credit history/business stability 
• Loan structure (e.g. if you’re choosing an interest-only agreement)

Interest rates are subject to fluctuation if you choose a variable rate mortgage, while with a fixed-term agreement, you’ll encounter different available rates when you reach the end of your fixed-rate term.  

What can I use as security for a commercial mortgage?

The most common form of security used in commercial mortgages is the property being purchased. However, certain lenders will accept other business assets, such as vehicles, machinery and other high-value equipment.

When evaluating assets used as security, commercial mortgage lenders will consider the asset’s value and the equity (what proportion is owned and owed). When the target property itself is the security for the loan, this is the LTV – lenders usually require equity to be at least 25% (allowing a LTV rate of up to 75%).

‍

Pros and cons of commercial mortgages and alternatives to consider

As with any financial product, there are different benefits and potential drawbacks to commercial mortgages to consider, with the main ones outlined below:

Commercial mortgage advantages

• Tax-deductible interest – the interest you pay on a commercial mortgage is usually tax-deductible, reducing your overall business tax bill.
• Rental income possibilities – you can rent out the property to generate additional income and long-term financial gain.
• Capital growth opportunities – if the property increases in value, your equity grows, unlike leasing agreements, where you don’t benefit from asset appreciation.
• Greater control – owning premises protects you from rent increases and offers more freedom to make updates and upgrades when required.

Commercial mortgage disadvantages

• Large deposits required – you typically need a sizable deposit, unlike most other business loans, which can tie up working capital.
• Less flexibility – owning a building makes relocation more complex and time-consuming compared to renting or using short-term facilities.
• Maintenance costs – using a commercial mortgage rather than a lease means you're responsible for repairs, upkeep and compliance obligations, which add pressure and ongoing costs.
• Increased risks – defaulting on repayments could result in the lender repossessing the property, which could severely impact your business, unlike unsecured loans, which don’t require collateral.

Alternatives to commercial mortgages

When weighing up the pros and cons of using a commercial mortgage for your business property needs, you should also explore other suitable finance solutions. 

Here are the main alternatives to commercial mortgages to consider:

• Bridging loans: As the name suggests, this short-term finance solution is ideal for getting quick access to capital to bridge funding gaps for property purchases and other large-scale acquisitions.  
• Commercial property leasing: Instead of buying a property, you can lease the premises, which lowers your upfront costs and is less of a financial burden. However, it means you won’t build equity or benefit from any growth in the property’s value.
• Asset finance: This covers a range of agreements for purchasing or hiring business assets, including hire purchase and lease finance options. While most commonly used for acquiring equipment, machinery and vehicles, you can refinance existing assets to release equity for property needs. 
• Business loans: You can use a secured or unsecured business loan to cover property rental or improvement costs, or reach funding targets for property purchases. It’s a short-term funding solution that often gets you access to capital faster, especially in the case of an unsecured loan, where you don’t need to put up business assets as collateral.

How to choose between a commercial mortgage and a large business loan

If you’re choosing between a commercial mortgage and a large business loan, you should ask yourself the following questions:

• Do I want to own or lease the property? A commercial mortgage is ideal if you plan to own and stay in the property for the foreseeable future. A business loan is a good option if your property needs are more short-term.
• How much capital do I have to invest upfront? Commercial mortgages usually require a large deposit, while most business loans don’t involve deposits at all, meaning less impact on cash flow.
• How quickly do I need the funds? Business loans can be approved and released faster (often within days or weeks), whereas commercial mortgages involve steps, including due diligence, and take longer to complete.
• What kind of repayment length and terms are most suitable? Mortgages offer long-term repayment (typically 10-25 years), while large business loans usually have lengths of 1-5 years.
• Am I comfortable using the property as collateral? With a commercial mortgage, the property often acts as security (and can be repossessed if repayments are missed), while some business loans can be unsecured, meaning no business assets are required as collateral.
• Do I need the property to drive income and growth opportunities? Consider whether you want to own or lease the property and the equity, income, flexibility and cost-efficiency pros and cons.

If you think a business loan is a better option for you, iwoca offers flexible business loans designed for SMEs. We provide fast access to funds (with approval decisions within 24 hours), flexible repayment terms aligned with your cash flow and options to repay early without charge. 

You can borrow between £1,000 and £1 million for a few days up to 5 months for any business use, including property purchases and development, and you only pay interest on the amount you draw down. 

Find out how to apply for a large business loan with iwoca and check out our loan calculator to see what your likely monthly repayments would be.